Saudi Arabia and other Opec+ members have announced on Sunday (April 2) that voluntary cuts would be made to their oil production of about 1.15m barrels a day in a surprise move they said was aimed at supporting market stability.
The group of oil-producing nations had been largely expected to stick to its already agreed 2m bpd cuts when its ministerial panel, which includes Saudi Arabia and Russia, meets virtually on Monday.
In line with this, RHB Investment Research said they are positively surprised by OPEC+’s 1.15mbpd cut, which is seen as a pre-emptive measure for potential demand weakness. “Consequently, we increase our 2Q23 projection to USD85/bbl and project oil prices to average at USD87/bbl in 2H23.” This is deemed to have an overweight consequence on the oil & gas segment with the research houses top picks being Dayang Enterprise, Malaysia Marine & Heavy Engineering, Yinson, Bangchak Corp, and Thai Oil.
On Sunday, the OPEC+ alliance announced a voluntary cut of 1.15mbpd to stabilise the oil market. Amongst the cartel, Saudi Arabia will take the largest cut with a quota of 500kbpd. This is followed by Iraq (211kbpd), the United Arab Emirates (144kbpd), and Kuwait (128kbpd).
According to Reuters, the production cuts will start in May and last till the end of the year. As part of this alliance, Russia will also extend its production cut of 500kbpd until end 2023.
This action takes total production cuts announced since Oct 2022 to 3.66mbpd.
RHB deems this a positive surprise, as we had anticipated price-supportive measures to only appear in the latter part of this year. Recall that OPEC+ scheduled its Joint Ministerial Monitoring Committee meeting for today. The 1.15mbpd cut is also seen as a pre-emptive step to accommodate any potential demand weakness.
Meanwhile, RHB noticed that not all OPEC+ members have participated in this action, given that some member states already produce lower than what is expected.
Conversely, it’s mindful of how this latest cut may further strain Saudi Arabia’s relationship with the US, given that the latter has stated in media reports that any such action by OPEC+ was “not advisable”.
Based on the Energy Information Administration’s disclosure, the US’ Strategic Petroleum Reserve’s (SPR) stock level was at 372m as of mid-Mar 2022, ie still at its lowest mark since 1984. Such a low SPR level leaves President Joe Biden with very few options to curb energy prices, as a further draining of the reserves could heighten national security risks and make the US vulnerable to another major supply disruption.
RHB, in its Regional Sector Report cited today (April 3) that they will increase the 2023 Brent crude oil price assumption to USD85/bbl from USD83/bbl and maintain 2024-2025 projections at USD80/bbl.
RHB also projects prices to average at USD87/bbl in 2H23.
Despite current oil demand still being projected to see positive growth of 2.3mbpd, RHB does not discount the possibility of such numbers being trimmed in the coming quarters.
“We also believe prices are likely to remain intact, as OPEC’s influence remains strong and its strategy to protect the oil market – via production cuts – also remains intact, citing the downside risks to the sector call includes: weakening oil prices and demand and a decrease in spending by clients.
